Show Me the Cash!

I remember the moment well.  I had just reviewed the P&L and things were looking good.  The business was healthy.  Sales were up.  Expenses were down.  Projections were being hit.  Everything was moving in the right direction.  I smiled. 

And then, our Controller walked into my office and said: (numbers fictitious)

“We have a problem.  I have $40k of bills on my desk and payroll is due this week, and we only have $80k in the bank.”

I thought of a phrase I’d heard a thousand times, and at this moment, I finally understood it:

A quick look at the balance sheet showed a monstrous Accounts Receivable number.  Yes, sales were up and expenses were down, as the P&L showed.  But people weren’t paying us on time.  Revenue reported as sales wasn’t showing up as cash in our bank account. 

Thankfully we were at a stage with the company where we could weather the storm.   We have always been diligent about keeping the company debt-free so it’s easy enough for us to get a credit line from a bank or a short-term loan from investors if need be.

However, many early stage companies don’t have this luxury.  Cash in the bank is their life blood.  Run out and you’re done.  You can have a stack of purchase orders and a P&L that makes you feel like a rock star, but without cash you’ve got nothing.  Seems simple enough.  But, in my experience, it’s often overlooked.  And I’ve been guilty myself.

In my situation, cash flow comes from the royalties paid by our franchisees.  We establish our operating budget based on them.  If franchisees are late with their payments to us, we have a problem.  Often, it’s the result of a trickle-down effect – the franchisees’ customers are late in paying them so they’re late in paying us.  The cash flow problem runs downstream.

Which is why I encourage entrepreneurs, franchise candidates and early stage business owners to do two things:

1. Start with more cash than you think – like 2-3x
2. Establish a culture with customers of prepayment or 30 day term maximums (with a sizable down payment) from the outset and be ruthless about enforcing it

We were way too laid back in the beginning about Accounts Receivable.  Our mentality was – “we want our franchisees to know that we have their backs and if that means delaying a payment to help them out, so be it.”  The problem was that the effect was the exact opposite of our intent.  It created debt-ridden franchisees, put the company as a whole at risk, and penalized the franchisees who were paying on time as they didn’t get all the services/products they otherwise would have had we had more money to invest in projects and infrastructure.

We’ve been working for years to turn around this mentality.  But culture is hard to change.  It takes a lot of time and energy.  It’s much better to establish a good one from the outset.  My suggestion for how to do so is threefold:

1) If you’re launching a company, start with as much cash as possible.  Make sure to add a “cash flow” line to your pro forma to see how much you’ll need.  Then double it.

2) If you’re in revenue and signing up customers, get them to pay as much as possible up front and be adamant that they meet your financing terms.

3) And if you’re in the throes of running a small business, give cash flow as much (if not more) attention than sales and income.

Because at the end of the day, cash really is king.  And it’s the type of lesson you don't want to learn the hard way.

Don't Drive Into a Storm on Bald Tires

I started to write this post about National Golf Day after seeing my Twitter feed held hostage for most of yesterday, but then, thankfully, I received an email about a more relevant topic for golf entrepreneurs so I switched directions.

In short, you can learn about National Golf Day here and read an account of the day's festivities here.

Which leaves me with this note that just crossed my inbox from an entrepreneur I met at StartEngine about his search for seed-stage investors:

"In retrospect, it would've been good to understand early on how important "traction" is.  It's more important than many of the other elements we spent so much time working on (pitch, slides, due diligence, projections, even much of the networking).  We'd have re-prioritized."

That's great feedback for me as a Mentor and great advice for all aspiring entrepreneurs.  He's absolutely correct.  "Traction" is proof that a market and customer exist.  That is more important to investors than anything else.  And it should be the top priority of entrepreneurs as well.  What does a great pitch, deck, business plan, etc. matter if there isn't a market or customer?

The chicken/egg question that then arises is - how do you get "traction" when you have no money but investors want traction before giving you money?

The answer is to bootstrap.  One of my most influential MBA professors wrote a great article and created a great slide show on this topic that I encourage you to read.

Bootstrapping requires acquiring customers early and often.  It's a constant focus on sales.  It's minimizing your start-up costs by generating revenue and churning cash flow quickly.   If your product or service is really that good, you may even be able to get PO's before the product/service is built - which, in essence, would make your customers your financiers.  Bootstrapping works especially well when manufacturing is involved.

But bootstrapping for a length of time isn't financially feasible for many tech entrepreneurs who don't have a clear and immediate revenue model.  Too many of these folks are, in my opinion, focused on the astonishing success of the Instagram's of the world ($1 billion for a team of 13 with no revenue?!?!) and not mindful enough of the reality that 1,000s of companies with this model fail for every one Instagram that succeeds.  TechCrunch et al just don't publish the failures (understandably) so the picture you see of easy start-up glory painted in the news does not reflect reality.

If I could do it all over again, I'd advise my friend at StartEngine (who has a mobile app company) to bootstrap, get a Minimal Viable Product (MVP) into the App Store, and then spend a minimum of 50% of his time thereafter focused on user/customer acquisition.  If the product solves a major pain, people will use it even if it's not perfect.  The bigger the pain-point, the more users you'll get.  And that provides the traction you need to convince the investment community that you're worth the risk of their capital to see what the proverbial "flop" holds for your company.  Add a revenue model to that equation - which I believe every start-up should have from the outset - and you're ready to put the pedal to the metal.

Equally as important for you the entrepreneur, "traction" let's you know whether you're spending time on a real business with a viable market and customer-base.  With it, you know to endure the valleys because the peaks could be spectacular.  Without it, you know (hopefully) that you're driving into a storm with bald tires and life is too short for such nonsense.

Clarity Within the Noise

I was recently invited to be a mentor for an incubator called StartEngine, which is a 90 day program for very early stage technology companies to get their startups off the ground.  I’ve met with several companies since and I’m noticing a recurring theme – the entrepreneurs are getting conflicting information from the various mentors/investors/advisors around them, and they’re having trouble making sense of it. 

Here was an exchange I had last week:

Entrepreneur with a social media / mobile app company – “Last week we had an investor come in and say that we had to have a business/revenue model from the outset.  Then one of our mentors told us that we don’t need to worry about a business model right now and instead just need to build product.  Then a separate person told us that it’s all about users.  Which is it?”

Me – “It depends.  What do you ultimately want the company to be?”

Entrepreneur – “(insert standard 30 second pitch)”

Me – “Doesn’t answer the question.  Let’s try it this way – why did you get into this business?"

Entrepreneur – “To make life easier for my market of users.”

Me – “Ok, then answer me this – one year from now, would you rather have 100,000 free users and be dependent on outside funding or have 10,000 paying users who each pay a couple of bucks and have you on the road to sustainability?”

Entrepreneur – “Not sure, which one would investors look more favorably upon?

Me – “That depends on what you ultimately want your company to be.”

This discussion is typical of several conversations I’ve had with other entrepreneurs about the unique challenges and decisions they face with their business.  It’s not too different from the process I go through daily with folks interested in starting a TGA franchise.  With all of the noise out there offering business advice and guidance – blogs, books, Twitter, advisors, mentors, investors, etc. – it is understandable why many young entrepreneurs find themselves with spinning heads.

When it comes to big decisions, my advice is simple – always remember why you got into the business (vision) and know what your long-term goals are (strategic plan).  Then make decisions that align accordingly.  It works because the vision is set in stone at a period in time, and thus will keep you grounded, while your long-term goals are malleable and thus will allow you to adjust and pivot. 

I was discussing these thoughts yesterday with our Curriculum Consultant at TGA who has a doctorate and 25 years in education, and she told me about a book called “The Element” by Sir Ken Robinson.  She described it as a book that identifies four conditions for achievement – aptitude, passion, attitude and opportunity.  The two features of being in one’s “element” are aptitude and passion, and the conditions for it are attitude and opportunity.  Basically, you’ll be successful if you do something you’re good at and passion about, so long as you have a positive attitude and the right opportunity.  I ordered the book last night and I look forward to diving deeper into the concept as I think it aligns with the advice I’ve been giving to the entrepreneurs.

I make a concerted effort to constantly read, learn and surround myself with people smarter and more experienced than me.  I certainly encourage all entrepreneurs to do the same.  But when it comes to big decisions with your business, the focus shouldn’t be on what others are telling you but rather on what aligns with your reasons for getting into the business and what you ultimately want it to be.

Create, Know & Obsess About Your KPI's

Please note that a variation of this blog catered towards franchise candidates first appeared in the Franchise Business Review.  You can read it here.

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1.    Efforts made in marketing (i.e. Are you doing the work?)

2.    Conversion Rate (i.e. How effective is your message?)

3.    Profitability

A good set of KPI’s addresses these three topics. 

If you’re running a business, your KPI’s should be central to your thoughts and actions at all times.

If you’re thinking about starting a business, figure out what your KPI’s will be in advance so you can make an honest assessment of the opportunity.

If you’re analyzing a business as a potential investor or franchise candidate, ask about KPI’s to quickly ascertain the health and key drivers of the business model.

Hopefully this outline provides some guidance on recalibrating or creating these incredibly important measurements which will serve as the lifeblood of your business.  Good luck and happy entrepreneuring.

In working every day with current and aspiring entrepreneurs I often find that metrics and data don’t receive the attention they should.  I often hear comments like – “How much money can we make?” or “How long will it take to do so and so?” but these are cursory questions that often don’t scratch the surface of a business model.

Every business, whether real or in creation, has key revenue and expense drivers.  All entrepreneurs should translate these drivers into “Key Performance Indicators” (“KPI’s”) or something similar to measure the company’s performance.

KPI’s are the heart, brain and central nervous system of a business.  Want to know if you’re investing your time and money in the right places?  Know how these investments relate to your KPI’s.  Want to know when to crack open the champagne or hit the panic button?  Know the ceiling and floor of each KPI and create reasonable goals/milestones.  Want to know if a key employee is the right person for the job?  Look at their impact on the KPI’s relative to what they’re costing the business.  And so forth.

I was speaking recently with Brian Destarac, a business coach and founder of Cobalt Business Solutions, and he had a great outline for looking at KPI's that I wanted to pass along.  He identified three categories:

TGA is Now TENNIS & Golf Adventures

I’m pleased to announce that TGA has officially launched a second franchise company called TGA Premier Youth Tennis that closely replicates the model of TGA Premier Junior Golf.

The decision to enter the tennis industry has been under consideration for at least a year and it brought up a host of issues that drilled to the core of our company and its entrepreneurial spirit.  I wanted to share some of them with the hope that they’re applicable to you as you consider, pursue and/or manage your entrepreneurial endeavors.

Core Competency – What is the company really good at? 

Most people think of TGA within a golf context – that we’re really good at running golf programs on elementary school campuses.  For many years, we saw ourselves in this way too. 

But as the company evolved, we recognized that anyone can walk onto a school campus and try to teach golf.  Many have.  But no one has achieved anywhere close to our type of size and impact.  The reasons for this are twofold – 1) we created a viable business model for scaling a school-based youth sports business; 2) we focused heavily on being an “enrichment” program – i.e. building a classroom environment with instructors trained on educational concepts who deliver programs that include character development, life skills, physical activity and the integration of academic subjects such as math and science. 

Thus, our core competency is not about golf but rather the ability to deliver enrichment programs through a business model that is viable, replicable and scalable.  As such, we believe that any popular sport/activity not traditionally done on a school campus (e.g. tennis and golf) can be plugged into this model with success.

I believe that understanding a company’s core competency is probably the single most important factor to building long-term sustainable growth and I’m confident that we got it right.

Organizational Values – What does the company stand for?

Everyone involved with TGA is hugely passionate about golf.  Most people get involved with us to pursue this passion and it's one of our single most unifying values.  However, while some of these folks are also tennis enthusiasts, just as many are not and have no emotional interest in being involved with a tennis company. 

We put tremendous thought and research into whether a voyage into tennis would fracture the foundation of our organizational values.  We determined that the answer is “no.”  The reason is because we believe there is a deeper value we all share than golf, and that is a stronger passion to positively impact kids, families and the communities we serve.  We feel that tennis adds opportunities for us to do this in greater scale and effectiveness.

Additionally, franchise law forced us to offer tennis as a separate franchise from golf so people can choose which programs and passions they want to pursue – golf, tennis or both. 

I believe that having a corporate identity with clear core values is critical to building a strong organizational culture and I think tennis keeps ours intact while offering opportunities to make it stronger.

Risk vs. Opportunity – How much are we willing to gamble?

We ran pilot-programs for tennis in six markets nationwide and the early results were encouraging, albeit preliminary.  Then, various opportunities of high intrigue within the tennis industry started arising as people took note of what we were doing.  Joshua Jacobs, TGA’s CEO and my friend/partner, is an ambitious visionary who operates mostly based on experience and instinct so he wanted to move full steam ahead.  I am more of a quantitative, process-driven individual so I wanted to proceed slowly, if at all.

Ultimately, I remembered something my dad always says which is: “Things either get better or they get worse, they don’t stay the same.”  And I think that is very relevant here.  Josh was right – we have an opportunity to do something great with tennis and opportunities like this are few and far between.  So we compromised by slowing him down and speeding me up. 

Yes, there are definite risks and significant challenges with our decision.  But we’ve been diligent about our preparation and feel confident with our decision.  And that’s the key – understanding risk tolerance and making educated decisions.  For us, it’s time to take the leap and see what happens.  “Ready Fire Aim.”

Or, as we say at TGA, “Keep Swinging!”

"Owner's Discretionary Income"

Everyone wants to know the same thing when analyzing a business – what’s the profit?

Prospective business owners want to know a company’s earning potential.  If analyzing a franchise, candidates should (and often do) ask existing franchisees how much money they’re making and what the financial viability of the system is.

Business owners want to know how much value they’re deriving from the company.

Investors, board members, franchisors and other interested parties want  to know the operational efficiency of the business.

The problem is that determining “profit” isn’t as simple as looking at the bottom line of a P&L – especially when analyzing a private company like TGA Premier Junior Golf that is usually home-based with a single owner/operator.  That’s because the P&L often includes a variety of benefits to the owner that are entered as expenses, such as an owner’s salary/draw, entertainment, etc.

At a recent conference, I learned of a financial calculation from a fellow franchisor that solves this problem.  It’s called “Owner’s Discretionary Income.”  Here’s the equation:

company profit (Net Income line of the P&L)

+ owner’s salary (including draw, dividends, etc.)

+ fringe benefits (things you’d likely pay for out of your own paycheck if not a business owner)

= Owner’s Discretionary Income

This calculation tells you exactly how much value a business is delivering to its owner.  It also tells you how well the business is functioning from an operational standpoint.  That, in my opinion, makes it extremely relevant and important for business owners and prospective entrepreneurs alike.

Perception Trumps Reality

I attended a “Franchisor Boot Camp” last week in Denver that was hosted by Greg Nathan, a well-respected expert on franchising and psychology.  The goal of the conference was for franchisors to learn techniques for building more profitable partnerships with their franchisees.  It was a great learning experience with lessons that apply to both business and life, and I’ll likely touch on many of them for a long time in this blog.

One of the first and most frequent things Greg Nathan said was:

“When perception meets reality, reality comes in second place.”

This resonated with me because I recognize it as being very true but it’s a difficult concept for me to wrap my mind around. 

“Reality” is defined as the state of things as they actually exist, rather than as they may appear or might be imagined.  “Perception” is defined as the process of attaining awareness or understanding of the environment by organizing and interpreting sensory information.

My tendency is to look at facts, analyze them in black/white terms and come to a logical conclusion.  Meaning, I focus on “reality” and place a lot of value on it.  And I’m a big believer in taking responsibility for this reality.

What can be missed in this process, however, is an analysis of how people perceive these facts/terms/conclusions.

For example, when a franchisor rolls out a new initiative, have they taken into account how the franchisees will receive it?  Let’s say the initiative will create long term value but it requires an initial investment of time and money.  How will the franchisee feel when he hears about this required investment?  Maybe his cash position is strong so he sees it as a great opportunity.  Or, maybe his margins have been squeezed during the recession, the financial stress of which has caused stress with his spouse, and this new expense will be perceived as the proverbial “straw” that breaks not only the business, but the marriage. If the franchisor is unaware of this, the messaging and execution will be way off.  Now, while the franchisor feels good about themselves for this new initiative, the franchisee blames the franchisor for ruining his business and his marriage.  The seething franchisee then becomes vocal about his disdain for the franchisor and starts eroding the culture of the entire organization.  Meanwhile, the franchisor doesn’t know what the hell just happened.  They deployed an initiative that creates long term value, which is what the franchisees pay royalties for, right?

This is extreme, but it demonstrates how a mismatch between reality and perception can spin out of control pretty fast.  Whether you’re a franchisor, franchisee, entrepreneur, manager or anyone else in the workforce, you can probably think of your own similar examples.

So how do we build a better understanding of people’s perceptions?  According to Greg Nathan, the answer is to connect with them on a personal, human level.  Talk to them.  Ask questions.  Understand what’s going in their lives.  How are they feeling?  What are they nervous, excited, etc. about?  Let them tell you where they’re coming from.  Empathize, and be authentic.  Not only does this help you understand their perceptions, it develops trust and commitment.  And this makes all the difference in your ability to communicate, assist, lead and motivate.

Developing healthy relationships is a critical component of business success, especially for an entrepreneur when the company is young and fragile.  Understanding that perception often trumps reality is a key part of building these strong, healthy relationships.  I’ve added another post-it note to my desk to remind me of this “reality” and hopefully the advice helps you too.